Most OECD countries provide subsidies to stimulate the entry and growth of small entrepreneurial firms. This column argues that a better policy would be to combine these subsidy schemes with policies that improve the merger and acquisition market for small entrepreneurial firms, because the best strategy for such firms is to make an early entry to market to signal innovation quality and overcome asymmetry problems. Entrepreneurs would be able to create bidding competition among incumbents and receive a higher acquisition price, incentivising them to develop breakthrough innovations that will raise welfare.

Many drugs sold in poor countries are counterfeit or substandard, endangering patients’ health and fostering drug resistance. Since drug quality is difficult to observe, pharmacies in weakly regulated markets may have little incentive to improve quality. However, larger markets allow firms to reorganise production and invest in technologies that reduce the marginal cost of quality. This column discusses how the entry of a new pharmacy chain in India led incumbents to both cut prices and raise drug quality.